How to get your business investor ready

How to get your business investor ready

Growing your business quickly can be very challenging because you will often become constrained by your ability to fund your working capital or take advantage of opportunities that arise. You may try pitching to a lender to obtain funding support however lenders in most instances if you are significantly undercapitalised will not be willing to take on that position.

 

This is where raising capital and turning to an investor for a financial boost can really help you skyrocket your business growth. Preparing to be ‘investor-ready’ isn’t easy or quick but it isn’t as nerve-wracking as appearing on the Shark Tank tv show. It’s not to say that investors won’t openly criticise your business concept or shut you down without going through your pitch or forecasts though. Investor rejection can be for a variety of reasons, sometimes investors will turn you down simply because they only invest in certain regions, sectors or turnover sizes as that is the market they understand.

 

Investors are cash rich but time poor, so you will need to be confident and concise with your pitch but comprehensive in your preparation to stand out amongst other businesses on the hunt for the investor funding. It’s important to note that an investor may take months of due diligence to be prepared to make a significant investment.

 

Securing investors can be incredibly intimidating, but as long as you’re well-prepared by having a polished pitch deck, forecast financials and an operational plan you’ll be able to answer the questions an investor might have, attract their attention and secure funding.

Why a business plan matters to an investor

Not only is having a business plan important when it comes to running your business, it’s also a crucial component when pitching to investors. Frustratingly for both parties, plenty of failed pitches are great business ideas but are rejected because they lack basic things like a concise or detailed plan of how it will be achieved or have confused numbers.

 

Investors aren’t interested in reviewing a generic business plan template you found on the internet. They want a genuine operating plan for the business which is a series of ‘live’ working plans to achieve results across all aspects of the business.

 

The operating plan should comprise of measurable financial and non-financial KPIs and milestones. The plan should include your yearly goals (financial forecast, marketing and sales) and your areas of focus projects. Your yearly goals should be monthly stepped to ensure you can measure your progress each month. Each area of focus (marketing, governance, etc) should have a detailed list of tasks that you will be executing into fruition.d above.

What investors look for before investing

When pitching to investors, a lot of business owners tend to talk only about ‘massive potential’ or if they can ‘just get 1% of the market’. Investors are pressed for time, don’t waste it by waxing poetic. Get to the point quickly while still packaging your message well.

 

It’s highly likely an investor knows nothing about your business, so be sure to concisely cover these criteria. Have these things in mind and do your research in advance so you don’t freeze when answering an investor’s questions:

Unique selling proposition and market size

Your unique selling point(s) should be able to wow the investor and help you edge out any of your competitors for the investor’s time and energy. Equally important is a significant TAM (total available market), an investor needs to know there is a sizeable market and demand for similar products or services. You might have a very unique product but if it is not widely sought after it’s not appealing and vice versa.

 

Plausibility of the execution

To demonstrate the plausibility of the business owner and team’s ability to execute the vision, make sure you include the milestones achieved to date by the team and background of team members. You need to provide comfort that you will essentially be executing the same proven processes on a larger scale and that you are actively mitigating risks associated with the venture. An investor is unlikely to invest in highly speculative and untested strategies and processes. Explain your processes, evidence that they have worked and elaborate how the additional funding will lead to business growth.

 

Multiple exit options for investors

Most investors we speak to want to understand how and when they can ‘get out’ of their investment. Specifically, who will buy out their shares and when? Will the shares be repurchased by the current owner in three years’ time? Will their shares be purchased via a trade sale or IPO (Initial Public Offering)? Similarly, what options are there if the business and team doesn’t perform the way you expected? You will need to offer them multiple exit options so they have the ability and choice to exit their position as a financial backer.

 

Financial forecast

Don’t just ask investors for $1m, $5m or $20m, because that ‘should be enough’.

Prepare a detailed five-year integrated forecast (Profit & Loss, Balance Sheet, and Cashflow). You need to know your numbers, how much you’re going to utilise both monthly and annually and a breakdown of where you’re allocating the money and why it’s necessary. You have to be prepared to answer questions to justify your anticipated revenue per product or service, your forecasted standard operating expenses and have a clear path to profitability (excluding ‘one off’ investments to scale the operations). This forecast should be achievable and have a detailed list of assumptions. Do not create a hockey stick growth plan because you think it will impress an investor. Your forecast should form the basis of how your performance will be assessed post investment.

 

What return on investment are you projecting for the investor?

A vital step that is often ignored is to calculate an estimated return on the investor’s money. If they invest $x how much will they receive back and when? Their return will be made up of dividends (income return) and the increased value in their shares (capital return) over the forecasted period. Although it is an estimated return and not a contract, it will provide significant comfort to investors that you understand that their primary goal is to get a significant return on their investment. If there is not a projected suitable return from this investment that is realistic and achievable, they will simply choose another option.

 

Regular reporting

Although this is not the most important aspect of investors decision-making process it will help you to stand out from other parties seeking investment as it speaks to your management capability. During the due diligence period provide potential investors with monthly or quarterly reports to keep them informed, this will provide significant comfort that you are executing the strategy and utilising funds in line with the vision.

 

Willingness to compromise

Investors have different approaches to their level of involvement; some will invest their money and only seek yearly updates whilst others will want an active role in the business and others will not want an active role rather want to strategically guide the business in a new direction to take advantage of opportunities better known to them. It is important to understand that investors are part owners of the business not just money; they will have the right to express influence over the business to some degree.

 

Your valuation

Although, your desired valuation will not likely be the agreed ‘buy in’ value it is vital that your valuation is logical and determined based on market valuation methods. It is widely understood that pre-money valuations can be more of an art than a science and often can include a combination of different valuation methods.

 

For start-ups or early-stage businesses methods include:

• Cost to Duplicate

The cost of creating your business from scratch can be used as a guide for valuing your business.

• Market multiple (revenue)

This will be determined based on recent financings and M&A transactions within your industry.

• Discounted Cash Flow

DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth.

• Valuation by Stage

The further the company has progressed along the development pathway, the

lower the company’s risk and the higher its value.

• The Scorecard Valuation Method

Weigh up the perceived overall percentage of a number of factors including the team, opportunity potential, product and need for additional future investment.

 

Valuation methods for more mature businesses include:

• Market multiple (EBITDA)

This will be determined based on recent financings and M&A transactions within your industry.

• Return on Investment (ROI)

ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100.

• Discounted Cash Flow

DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth.

• Book Value (Asset Based)

The formula is quite simple: business value equals assets minus liabilities

• Revenue/Earnings

This method takes your business’s revenue (gross income) or earnings (net profit after all business expenses are paid) and uses an industry multiplier to come up with a value.

It cannot be overstated, that investors are purchasing the business based on today’s value, they are not purchasing what the business could be in five years after a significant investment and everything has gone perfectly for the business.

What needs to be in your investor pitch deck

Preparing for an in-person ‘pitch’ meeting is nerve-wracking for most people however if you are well prepared by investing in a pitch deck supported by forecast financials and a comprehensive operational plan it will be a completely different experience. By going through the process of preparing those documents it will help you to concisely articulate your business and gain clarity on your execution path. It can also address a lot of investor questions before they even asked, is a great opportunity to highlight the team’s capability and most importantly improve your chances of getting the funds you need.

 

A pitch deck needs to be clear, simple, and concise. It needs to show that the business idea is not hard to execute, so keep it straightforward and don’t stray from simple explanations or solutions, especially if they’re unnecessary.

 

Addressing the following questions in your pitch deck means investors will have a good understanding of your business and what you plan to achieve:

What problem does it solve?

You need to be able to prove that your product or service serves a purpose and solves a specific problem that consumers have.

 

How is your solution better?

Your target customer needs to find greater value in your product or service and investors will be looking to see this. You need to explain why your solution is much more effective than anything else on the market. Define how your product or service provides a better experience for your customers and does a much better job in terms of being value-adding to your customer’s lives.

 

What is the size of the market?

You need to demonstrate that you have a great understanding of the market; the total available market (TAM) and the serviceable available market (is the portion of TAM targeted and served by your business’ products or services). In order to understand the potential opportunity, you’re dealing with.

 

Who is the team to make this happen?

Introduce your team, their roles and background in order to support the plausibility of the team being able to deliver. Highlight your business processes and how you get things done.

 

Achievements to date?

Impress the investor with what you’ve been able to achieve so far to show your authority and credibility in the industry. Also state your next few milestones you are currently working towards.

 

Financial Overview

Provide a summary of your financial performance to date and an overview of your forecasts with high level graphs or numbers. Do not include your full financials simply reference that you have them prepared and ready for discussion at the next phase of due diligence.

Winning an investor over and securing additional funds isn’t easy, but it can be achieved if you take the time to plan accordingly and become investor-ready.

 

Following these tips will boost your chances of getting investors and scaling to achieve your business goals.

 

If you want to learn more about exponentially growing your business through securing an investor, give us a call.